1. What can the government do when GDP growth decreases and unemployment increases?

2. Monetary Policy Monetary Policy is management of the money supply and interest rate by the central bank.

3. Wait, what’s the Money Supply?  It includes: cash and coins  And the balances held in checking and savings accounts

4. Wait, what are interest rates?  A rate which is charged or paid for the use of money Auto Loan Calculator

5. Definitions 'Contractionary Monetary Policy’  A decrease in the money supply EOC study guide Macroeconomics #17

6. Definitions 'Expansionary Monetary Policy'  An increase in the money supply EOC study guide Macroeconomics #16

7. Monetary Policy $  Manipulating the money $upply through the Federal Reserve System  Who controls the money supply?  In Plain English: Understanding the Federal Reserve In Plain English: Understanding the Federal Reserve

9. The Federal Reserve System  The Federal Reserve System is the Central Bank of the United States.  In charge of managing the nation’s money supply and ensuring the health of the banking system  Janet Yellen is Federal Reserve Chairman  Jacob Lew is Secretary of the Treasury Jacob Lew

10. The Fed’s Four Main Responsibilities 1. Formulate and implement the nation’s monetary policy—control the money supply! 2. Supervise and regulate banking institutions and protect consumers 3. Maintain the stability of the financial system 4. Provide certain financial services to the U.S. government, the public, financial institutions, and foreign government institutions EOC study guide Macroeconomics #18

11. The Fed's 3 Main Tools of Monetary Policy 1. Open Market Operations 2. Changes in the Discount Rate 3. Changes in Reserve Requirements EOC study guide Macroeconomics #19

12. 1. Open Market Operations  Fed’s primary monetary policy tool  Determines whether government treasury securities (bonds) should be bought or sold EOC study guide Macroeconomics #19 continued

13. 1. Open Market Operations Cont.  Expansionary Monetary Policy:  Buying treasury securities:  increases growth by putting more money in circulation (Fed pays for securities putting $ into the reserves, banks can lend more $) EOC study guide Macroeconomics #19 continued

14. 1. Open Market Operations Cont.  Contractionary Monetary Policy:  Selling treasury securities:  slows growth by taking money out of circulation (Fed sells securities back to banks, money moves from banks to Fed, decreasing the supply of excess reserves available to lend)  Investopedia video on OMOs Investopedia video on OMOs EOC study guide Macroeconomics #19 continued

15. Open Market Operations

16. 2. Discount Rate  The amount interest the federal reserve will charge to loan money to banks  Known as the lender of last resort  Currently the rate is 1%  Investopedia video clip Investopedia video clip EOC study guide Macroeconomics #19 continued

17. 2. Discount Rate Cont.  Expansionary Monetary Policy:  If the Fed decreases the rate, it is cheaper for banks to borrow money EOC study guide Macroeconomics #19 continued  Contractionary Monetary Policy:  If the Fed raises the rate, it is more expensive for banks to borrow money

18. 3. Reserve Requirements  Reserve requirements are funds (cash, etc.) that banks must keep in its vaults  Currently it is 10% of demand deposits EOC study guide Macroeconomics #19 continued http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1

19. Example of a 10% Reserve Requirement  You deposit $1,000 in the bank  The bank must hold $100 (reserve requirement)  The bank loans $900 out to Bob (excess reserves)  Bob buys a used car from Sally for $900  Sally deposits the $900 into her bank  The bank must hold $90 (reserve requirement)  The bank loans $810 to Steve (excess reserves)  Steve buys a computer from Larry for $810  Larry deposits the $810 into his bank  The bank loans must hold $81 (reserve requirement)  Etc.

20. 3. Reserve Requirements Cont.  Expansionary Monetary Policy:  If the Fed decreases the reserve requirements, it increases the supply of loanable funds and increases the growth of the money supply EOC study guide Macroeconomics #19 continued  Contractionary Monetary Policy:  If the Fed raises the reserve requirements, it decreases the supply of loanable funds and slows the growth of the money supply

21. Problems in Controlling the Money Supply  The Fed’s control of the money supply is not precise  The Fed does not control the amount of money that households choose to hold as deposits in banks.  The Fed does not control the amount of money that bankers choose to lend.  Summary Investopedia Video clip Summary Investopedia Video clip  Crash Course in Macro with Clifford 9 min Crash Course in Macro with Clifford 9 min